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KANJORSKI AMENDMENT TO ADDRESS COMPANIES THAT ARE “TOO BIG TO FAIL” PASSES IN FINANCIAL SERVICES COMMITTEE

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Washington, DC, November 18, 2009 | comments

Today, the House Financial Services Committee passed an amendment offered by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, to the Financial Stability Improvement Act by a vote of 38-29.  The Kanjorski amendment would empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy.  Therefore, American taxpayers should no longer be on the hook for bailouts, as financial companies would not be able to become “too big to fail.” The Kanjorski amendment outlines clear and objective standards for regulators to examine financial companies and reduce the level of risk their activities pose to our financial stability and our economy.

“Today’s passage of my amendment marks a crucial step for the American people and for the protection of our financial system,” said Chairman Kanjorski.  “I remember the dire situation we faced last fall, and we want to do everything we can to avoid such a situation in the future.  Looking forward, we have the capabilities to try to act in a preventative manner for the sake of every American and our economy.  Most of us yearn for the day when the phrase ‘too big to fail’ is no longer a part of our vocabulary.  Through responsible action advocated in this amendment, we can make that a reality.”

The Kanjorski amendment expands on a segment of the Financial Stability Improvement Act, by enabling federal action to address financial companies that are deemed “too big to fail” before resolution authority is needed.  The amendment transfers such mitigatory action from the Federal Reserve to the Financial Services Oversight Council and establishes objective standards for the Council to effectively evaluate companies to determine whether they are systemically risky.  Additionally, the amendment provides clear checks and balances by requiring the Council to consult with the President before taking extraordinary mitigatory actions.  A financial company also has the right to appeal any actions.

A summary of the Kanjorski amendment follows:

  • Objective Standards.  Size is by no means the only factor to determine if a financial company is “too big to fail.”  The recent financial crisis has shown that many other factors can also cause a company to become a systemic risk.  Rather, the amendment considers a variety of objective standards to determine if financial firms pose a threat to our financial stability, including the scope, scale, exposure, leverage, interconnectedness of financial activities, as well as size of the financial company.  The Kanjorski amendment does not cap the size of financial institutions.
  • Mitigatory Actions.  If a financial company is deemed systemically risky, the Kanjorski amendment provides responsible preventative actions to protect our financial system and curtail those risks.  These include modifying existing prudential standards, imposing conditions on or terminating activities, limiting mergers and acquisitions, and in the most extreme cases, breaking up the company.
  • Protects American Competitiveness.  We have learned from this financial crisis that we are all connected.  The Kanjorski amendment addresses the concern that our regulatory system works in conjunction with those around the globe.  Currently, the European Union is considering similar action, and harmonized regulations would benefit both economies.

Click here to view the text of the Kanjorski amendment.

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